Valuations have moved up; markets may be volatile in the near term, says Shibani Sircar Kurian of Kotak Mahindra AMC

livemint.com:

Shibani Sircar Kurian, senior EVP and the head of equity research at Kotak Mahindra Asset Management Company (AMC) pointed out that mid-cap and small-cap valuations are above their long-term averages. On a relative basis to large-caps, mid and small-cap valuations are at significantly higher levels as compared to long-term averages. In an interview with Mint, she talked about market fundamentals and macroeconomic scenarios. India’s outperformance, we believe, has been on the back of the trinity of (a) macro-economic stability, (b) strong corporate earnings, and (c) inflows (both domestic and FII).

While earnings have been holding up well, valuations have also moved up. Valuations are now above fair value. Nifty is now trading somewhat above long-term average valuations on a P/E (price-to-earnings ratio) and P/BV (price-to-book-value) basis (one-year forward).

Similarly, India continues to trade at a premium to emerging markets and the premium is now slightly above long-term averages. Midcap and small-cap valuations are above their long-term averages. On a relative basis to large caps, mid and small-cap valuations are at significantly higher levels as compared to long-term averages.

Hence, despite strong fundamentals, with the sharp up-move in the market, one must be prepared for some volatility in the near term even as the long-term argument for Indian equities and India’s growth story remains unchanged. The macroeconomic backdrop for India remains fairly buoyant with India standing out as an oasis in the desert. India’s macro fundamentals look resilient, for now, with (1) steady growth and (2) core inflation largely in check.